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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-24931
S1 CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2395199
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3390 PEACHTREE ROAD, NE, SUITE 1700
ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 812-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 8, 2000, the aggregate market value of the shares of common
stock of the registrant issued and outstanding on such date, excluding
11,348,342 shares held by all affiliates of the registrant, was approximately
$4,185,909,000. This figure is based on the closing sales price of $105.50 per
share of the registrant's common stock on March 8, 2000, and excludes shares
held by directors and executive officers because such persons may be deemed to
be affiliates. This reference to affiliate status is not necessarily a
conclusive determination for other purposes.
Shares of common stock outstanding as of March 8, 2000: 51,025,207
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
Not applicable.
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PART I
ITEM 1. BUSINESS.
You should consider carefully the following risks. If any of the following
risks actually occur, our business, financial condition or results of operations
would likely suffer.
WE DO NOT EXPECT TO ACHIEVE PROFITABLE OPERATIONS FOR THE FORESEEABLE FUTURE AND
THIS MAY NEGATIVELY IMPACT THE VALUE OF OUR COMMON STOCK
We incurred losses in 1999 and we expect to incur losses in 2000. At
December 31, 1999, we had an accumulated deficit of $207.9 million. In addition,
as a result of our recent acquisitions, we recorded approximately $928.7 million
of goodwill and other intangible assets, resulting in amortization expense of
approximately $306.8 million annually over approximately three years. Moreover,
we expect that our expenses associated with sales, marketing, research and
development, customer support and executive offices will continue to increase
over the near term, even though revenues may not keep pace with these expenses.
As a result, we expect to continue to incur net losses for the foreseeable
future.
Our future operating results will be adversely affected if, among other
things:
- there is insufficient demand for our products;
- we are unsuccessful in attracting and retaining motivated and qualified
personnel; or
- the amount of price and product competition we face increases as a result
of the growth of financial services activity on the Internet.
ACQUISITIONS MAY BE COSTLY AND DIFFICULT TO INTEGRATE, DIVERT MANAGEMENT
RESOURCES OR DILUTE STOCKHOLDER VALUE
We acquired three companies in November 1999 and have signed agreements to
acquire two additional companies since then. Integrating these companies and any
future acquisitions into our existing operations is a complex, time-consuming
and expensive process and may disrupt our business if not completed in a timely
and efficient manner. We may encounter substantial difficulties, costs and
delays in integrating acquired operations with our own, including:
- potential incompatibility of business cultures;
- potential delays in rationalizing diverse technology platforms;
- potential difficulties in coordinating geographically separated
organizations;
- potential difficulties in re-training sales forces to market all of our
products across all of our intended markets;
- potential conflicts in third-party relationships; and
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
In addition, we intend to continue to pursue acquisition or investment
opportunities in the future, which could cause us to:
- issue additional shares of our stock, which would dilute our current
stockholders' percentage ownership;
- incur debt and assume liabilities; and
- incur amortization expenses related to goodwill and other intangible
assets or incur large and immediate write-offs.
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OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND ANY FLUCTUATIONS COULD
ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
Our quarterly operating results have fluctuated significantly to date. If
we fail to meet the expectations of securities analysts or investors as a result
of any future fluctuations in our quarterly operating results, the market price
of our common stock would likely decline. We expect that we may experience
fluctuations in future quarters because:
- we cannot accurately predict the number and timing of contracts we will
sign in a period, in part because the budget constraints and internal
review processes of existing and potential clients are not within our
control;
- our clients' orders tend to be relatively large, and in any given period
a substantial portion of our revenues may be attributable to a few
clients;
- the length of our sales cycle to large financial organizations generally
lasts from six to 18 months, which adds an element of uncertainty to our
ability to forecast revenues;
- if we fail to introduce new or enhanced products, or if our competitors
introduce new or enhanced products, sales of our products and services
may not achieve expected levels and may even decline;
- our ability to expand the mix of distribution channels through which our
products are sold may be limited;
- our products may not achieve widespread consumer acceptance, which could
cause our revenues to be lower than expected;
- our sales may be constrained by the timing of releases of third-party
software that works with our products; and
- a significant percentage of our expenses is relatively fixed, and we may
be unable to reduce expenses if revenues decrease.
WE DEPEND ON A LIMITED NUMBER OF CLIENTS FOR MOST OF OUR REVENUE AND, IF ANY OF
THOSE CLIENTS TERMINATES ITS CONTRACT, OUR REVENUES AND FINANCIAL PERFORMANCE
WOULD DECLINE
Our business success depends on our relationships with a limited number of
large clients. On a pro forma basis giving effect to our recent acquisitions of
Edify Corporation, FICS Group N.V. and VerticalOne Corporation as if the
transactions occurred on January 1, 1999, we had one client which accounted for
our 21% of our revenue for 1999. We expect that we will continue to derive a
significant portion of our revenue from a limited number of clients in the
future.
A substantial number of our client contracts do not allow our clients to
terminate their contracts prior to the termination date without financial
penalties. These financial penalties are usually insufficient to replace the
ongoing revenue we would have otherwise received.
SYSTEM FAILURES OR PERFORMANCE PROBLEMS WITH OUR PRODUCTS COULD CAUSE DEMAND FOR
THESE PRODUCTS TO DECREASE, REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES
OR IMPAIR CLIENT RELATIONS
There are many factors which could adversely affect the performance,
quality and desirability of our products and could delay or prevent these
products from gaining market acceptance. These factors include:
- extraordinary end-user volumes or other events could cause systems to
fail or to operate at an unacceptably low speed, causing transaction
delays for end users;
- our products could contain errors, or "bugs", which could impair the
services we provide;
- during the initial implementation of some products, we experienced
significant delays integrating software and bringing banks online, and we
may experience similar difficulties or delays in connection with future
implementations and upgrades to new versions;
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- many of our products require integration with third-party products and
systems, and we may not be able to integrate these products with new or
existing products; and
- our products, or the back-end systems or other software used by our
clients, may not have adequately addressed the year 2000 problem, causing
our products to fail.
NETWORK OR INTERNET SECURITY PROBLEMS COULD DAMAGE OUR REPUTATION AND BUSINESS
Despite our security measures, the core of our network infrastructure could
be vulnerable to unforeseen computer problems. Although we believe we have taken
steps to mitigate much of the risk, we may in the future experience
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others. Unknown security risks
may result in liability to us and also may deter financial organizations from
licensing our software and services. Although we intend to continue to implement
and establish security measures, there can be no assurance that measures we have
implemented will not be circumvented in the future, which could have a material
adverse effect on our business, financial condition or results of operations.
The occurrence of any of these problems could reduce product demand from
potential customers and cause existing customers to terminate their license or
data center contracts with us. These problems could also require us to spend
significant capital to remedy any failure and could subject us to costly
litigation with clients or their end users.
WE MAY BECOME INVOLVED IN LITIGATION OVER PROPRIETARY RIGHTS, WHICH MAY BE
COSTLY AND TIME CONSUMING
Other parties may assert that our products, trademarks or other proprietary
rights require a license of intellectual property rights or infringe, or may
infringe, on their intellectual property rights. Any claims, with or without
merit, could:
- be time consuming;
- result in costly litigation;
- cause product shipment delays; or
- require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or at all, which could harm our business, financial condition
and results of operations. Litigation to determine the validity of any claims
could result in significant expense to us and divert the efforts of our
technical and management personnel from productive tasks, whether or not the
litigation is determined in our favor. In the event of an adverse ruling, we may
be required to:
- pay substantial damages;
- discontinue the use and sale of infringing products;
- expend significant resources to develop non-infringing technology; or
- obtain licenses to infringing technology.
Our failure to develop or license a substitute technology could significantly
harm our business.
We expect software to be increasingly subject to third-party infringement
claims as the number of competitors grows and the functionality of products in
different industry segments overlaps. Third parties may have, or may eventually
be issued, patents that would be infringed by our products or technology. Any of
these third parties could make a claim of infringement against us with respect
to our products or technology. In addition, we may become involved in costly and
time consuming litigation to protect the validity of our proprietary rights,
including patents and trademarks.
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IF WE FAIL TO DEVELOP AND EXPAND OUR DISTRIBUTION CHANNELS, IT WOULD IMPEDE
REVENUE GROWTH
An integral part of our strategy is to develop multiple distribution
channels, including a field sales force, value added resellers and original
equipment manufacturers. We intend to continue to expend resources to develop
the reseller channel. The loss of resellers, their failure to perform under
agreements with us, or our inability to attract and retain new resellers with
the technical, industry and application expertise required to market our
products successfully in the future could harm our business. To the extent that
we are successful in increasing our sales through resellers, those sales will be
at discounted rates, and our revenue for each sale will be less than if we had
licensed the same products to the customer directly.
Expansion of our direct distribution channel depends upon the increased
productivity of existing field sales forces and our ability to integrate and
train new sales personnel. The cost of these efforts could exceed the revenue
generated, and our sales and marketing organization may not be able to compete
successfully against the significantly more extensive and well-funded sales and
marketing operations of many of our current or potential competitors.
OUR MARKET IS HIGHLY COMPETITIVE AND, IF WE ARE UNABLE TO KEEP PACE WITH
EVOLVING TECHNOLOGY, OUR REVENUE AND FUTURE PROSPECTS MAY DECLINE
The market for our products and services is characterized by rapidly
changing technology, intense competition and evolving industry standards. We
have many competitors who offer various components of our suite of applications
or who use a different technology platform to accomplish similar tasks. In some
cases our existing clients also use some of our competitors' products. Our
future success will depend on our ability to develop, sell and support
enhancements of current products and new software products in response to
changing client needs. If the completion of the next version of any of our
products is delayed, our revenue and future prospects could be harmed. In
addition, competitors may develop products or technologies that the industry
considers more attractive than those we offer or that render our technology
obsolete.
A SIGNIFICANT PORTION OF OUR CLIENTS ARE IN THE RAPIDLY CONSOLIDATING FINANCIAL
SERVICES INDUSTRY, WHICH IS SUBJECT TO ECONOMIC CHANGES THAT COULD REDUCE DEMAND
FOR OUR PRODUCTS AND SERVICES
For the foreseeable future, we expect to derive most of our revenue from
products and services we provide to the banking industry and other financial
services firms such as insurance companies. Changes in economic conditions and
unforeseen events, like recession or inflation, could occur and reduce
consumers' use of bank services. Any event of this kind, or implementation for
any reason by banks of cost reduction measures, could result in significant
decreases in demand for our products and services.
Mergers and acquisitions are pervasive in today's banking industry. Our
existing clients may be acquired by or merged into other financial institutions
which already have their own financial Internet software solution or which
decide to terminate their relationships with us for other reasons. As a result,
our sales could decline if an existing client is merged into or acquired by
another company.
INFRINGEMENT OF OUR PROPRIETARY TECHNOLOGY COULD HURT OUR COMPETITIVE POSITION
AND INCOME POTENTIAL
Our success depends upon our proprietary technology and information. We
rely on a combination of patent, copyright, trademark and trade secret laws and
confidentiality procedures to protect our proprietary technology and
information. Because it is difficult to police unauthorized use of software, the
steps we have taken to protect our services and products may not prevent
misappropriation of our technology. Any misappropriation of our proprietary
technology or information could reduce any competitive advantages we may have or
result in costly litigation.
We now also have a significant international presence. The laws of some
foreign countries, including the laws of Belgium, where our subsidiary, FICS, is
headquartered, may not protect our proprietary technology as well as the laws of
the United States. Our ability to protect our proprietary technology abroad may
not be adequate.
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IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED TECHNICAL EMPLOYEES, WE
MAY NOT BE ABLE TO COMPETE
Based on the significant growth in our operations, we believe that our
future success will depend in large part on our ability to attract and retain
highly skilled technical personnel. Because the development of our software
requires knowledge of computer hardware, as well as a variety of software
applications, we need to attract and retain technical personnel who are
proficient in all these disciplines. There is substantial competition for
employees with the technical skills we require. If we cannot hire and retain
talented technical personnel, this could adversely affect our growth prospects
and future success.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR EXPECTED GROWTH, WE WILL NOT BE ABLE
TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN
We expect to grow rapidly. Our failure to manage our growth effectively
could impair our ability to successfully implement our business plan. Our growth
will place additional demands on our management, operational capacity and
financial resources, including our ability to recruit non-technical personnel
for management, sales, marketing and delivery positions. Because many of our
implementation and service engagements are large in scale, we must maintain
numerous teams of qualified technical personnel to serve our clients
efficiently. In addition, our systems, procedures, controls and resources,
particularly our client service resources, may not be adequate to support
continued expansion of operations.
INTERNET-RELATED LAWS COULD ADVERSELY AFFECT OUR BUSINESS
The adoption or modification of laws or regulations relating to the
Internet, or interpretations of existing law, could adversely affect our
business. Laws and regulations which apply to communications and commerce over
the Internet are becoming more prevalent. For example, a recent session of the
United States Congress resulted in Internet laws regarding copyrights, taxation
and the transmission of specified types of material. The European Union recently
enacted its own privacy regulations and is currently considering other Internet-
related legislation. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, the growth and development of the market for online financial
services, including online banking, may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online.
OUR VERTICALONE SERVICE MAY NOT SUCCEED IF FINANCIAL OR OTHER ACCOUNT PROVIDERS
DO NOT ALLOW US TO ACCESS END USERS' ACCOUNT INFORMATION FROM THEIR HOST SYSTEMS
Unless a significant number of financial organizations or other account
providers allow us to access their host systems to gather information for
aggregation by our VerticalOne service, we may not succeed in making the service
sufficiently useful for our clients' customers to consider it useful. Some
financial organizations or other account providers may object to this account
access and attempt to block or impede us from performing our aggregation
service. We may also choose to cease aggregating financial or other account
information from an objecting organization to preserve an existing or potential
client relationship or other business purpose.
RESTRICTIONS ON OUR EXPORT OF ENCRYPTED TECHNOLOGY COULD CAUSE US TO INCUR
DELAYS IN INTERNATIONAL SALES
Our solutions use encrypted technology, the export of which is regulated by
the United States government. If the United States government were to adopt new
legislation restricting the export of software or encryption technology, we
could experience delays or reductions in our shipments of products
internationally. In addition, existing or future export regulations could limit
our ability to distribute our solutions outside of the United States.
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WE MAY NOT BE ABLE TO OBTAIN CAPITAL NEEDED FOR FUTURE GROWTH FROM EXTERNAL
SOURCES AND, IF WE OBTAIN THIS CAPITAL THROUGH EQUITY ISSUANCES, YOUR INTEREST
IN US COULD BE DILUTED OR, IF WE OBTAIN IT THROUGH DEBT, OUR OPERATING
FLEXIBILITY COULD BE LIMITED BY COVENANTS
We may require additional financing to support our continued operations and
for general corporate purposes. We may not be able to fund all of our future
capital needs from income from operations. Consequently, we may have to rely on
third-party sources of capital, which may not be available to us on favorable
terms, if at all. Our access to third-party sources of capital depends on a
number of factors, including the market's perception of our growth potential and
our present and future revenue. We may also pursue equity investments from
strategic partners in the future. If we pursue additional equity offerings, our
existing stockholders' interests will be diluted. If we decide to use debt
financing, we may have to comply with a variety of operating covenants which
could limit our operating flexibility.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD NEGATIVELY AFFECT
OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
If our stockholders sell substantial amounts of our common stock, including
shares issued when options and warrants are exercised or shares of our preferred
stock are converted into common stock, in the public market following this
offering, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity or equity-related securities
in the future.
As of February 29, 2000, we had 50,973,048 shares of common stock
outstanding, assuming no exercise of outstanding options or warrants or
conversion of preferred stock. As of February 29, 2000, holders of approximately
7.4 million restricted shares of our stock or vested options or warrants to
purchase restricted shares of our common stock, representing 14.5% of our shares
outstanding on that date, have rights which may require us to register their
shares with the SEC. In addition, in connection with our pending acquisitions,
we have agreed, if these acquisitions close, to register with the SEC up to
approximately 2.0 million additional restricted shares for sale for the accounts
of holders of stock and options of these companies. By exercising their
registration rights and causing a large number of shares to be sold in the
public market, these stockholders could cause the market price of our common
stock to fall. In addition, if these stockholders demand to include their shares
in one of our registration statements, our ability to raise needed capital could
be adversely affected.
As of February 29, 2000, there were outstanding employee stock options to
purchase 16,200,593 shares of our common stock, options and warrants to acquire
6,425,413 shares of our common stock, and 1,061,514 shares of preferred stock
convertible into an aggregate of 1,694,990 shares of our common stock. The
common stock issuable after vesting and upon exercise of these options and
warrants and upon conversion of this preferred stock will be eligible for sale
in the public market from time to time. The options and warrants generally have
exercise prices significantly below the current market price of our common
stock. We have also reserved an aggregate of 4,500,000 shares of our common
stock for issuance to the former stockholders of FICS if FICS meets specified
performance targets while operating as our subsidiary. The possible sale of a
significant number of these shares may cause the market price of our common
stock to fall.
OWNERSHIP OF OUR COMMON STOCK BY OUR OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS MAY PREVENT A CHANGE IN CONTROL
Our directors, executive officers, principal stockholders and their
affiliates beneficially own a significant percentage of our outstanding common
stock. This concentration of ownership may:
- delay, defer or prevent a change in control of our operations, which
could prevent you from selling your shares at a premium;
- impede a merger, consolidation, takeover or other business combination;
or
- discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control, and may cause the market price of our
common stock to fall.
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MARKET VOLATILITY MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE
The trading prices of Internet stocks in general, and ours in particular,
have experienced extreme price fluctuations in recent months. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. The valuations of many Internet stocks, including ours, are
extraordinarily high based on conventional valuation standards such as price to
earnings and price to sales ratios. These trading prices and valuations may not
be sustained. Any negative change in the public's perception of the prospects of
Internet or e-commerce companies could depress our stock price regardless of our
results of operations. Other broad market and industry factors may decrease the
trading price of our common stock, regardless of our operating performance.
Market fluctuations, as well as general political and economic conditions such
as recession or interest rate or currency rate fluctuations, also may decrease
the trading price of our common stock. In addition, our stock price could be
subject to wide fluctuations in response to the following factors:
- actual or anticipated variations in our quarterly operating results;
- announcements of new products, product enhancements, technological
innovations or new services by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce industries;
- changes in the market valuations of other Internet or online service
companies;
- developments in Internet regulations;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- unscheduled system downtime;
- additions or departures of key personnel; and
- sales of our common stock or other securities in the open market.
In the past, securities class-action lawsuits have often been instituted
against companies following stock price declines. Litigation of this type, if
instituted, could result in substantial costs and a diversion of our
management's attention and resources.
INTERNATIONAL OPERATIONS AND CURRENCY EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY
AFFECT US
We conduct our business worldwide and may be adversely affected by changes
in demand resulting from:
- fluctuations in currency exchange rates;
- governmental currency controls;
- changes in various regulatory requirements;
- political and economic changes and disruptions;
- difficulties in enforcing our contracts in foreign jurisdictions;
- export/import controls;
- tariff regulations;
- difficulties in staffing and managing foreign sales and support
operations;
- greater difficulties in trade accounts receivable collection; and
- possible adverse tax consequences.
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In addition, we maintain our international executive offices and a
significant portion of our maintenance, consulting, and research and development
operations in Belgium. Therefore, our operations may also be affected by
economic conditions in Belgium. These risks associated with international
operations may harm our business.
BUSINESS
OVERVIEW
We are the leading global infrastructure provider of Internet-based
solutions for financial organizations. Through our "engage, enable, everywhere"
strategy, we provide the solutions that empower our client banks, brokerage
firms and insurance companies to engage and enable their customers to access
their financial information and conduct transactions everywhere the Internet is
available. We believe our solutions empower our clients to increase revenue,
strengthen customer relationships and gain competitive advantage by meeting the
evolving needs of their customers across various lines of business, market
segments and delivery channels.
We provide a comprehensive set of Internet-based financial services
solutions which touch every significant facet of the financial services
industry. From banking, brokerage and insurance to personal financial management
and tax preparation capabilities, our suites of consumer, retail, small business
and corporate applications provide a comprehensive set of solutions for global,
national, regional and local financial organizations. Our solutions, including
our VerticalOne personal information aggregation service and our Edify
interactive voice response technology, reach beyond traditional online financial
services to help financial organizations deliver value to their customers,
resulting in greater customer retention and increased revenue opportunities for
our clients. In addition, we have implemented wireless solutions in the United
States, Europe and Australia that allow our clients' customers to access account
information and conduct transactions through cellular telephones and hand-held
personal digital assistants.
We built our revenue model based on charging our clients for our technology
as they use it to deliver added value to their customers. To date, we have
derived a significant portion of our revenues from licensing our solutions and
providing professional services. We generate recurring revenues based on the
numbers of our clients' end users who use the solutions we provide, as well as
from the transactions we process through our Data Centers.
INDUSTRY
Use of the Internet is growing dramatically. In 1999, International Data
Corporation, a global market research firm, estimated that there were 66 million
Internet users in the United States and 132 million Internet users worldwide. By
the end of 2002, IDC estimated that the number of Internet users will increase
to 125 million in the United States and 320 million worldwide. A 1998 U.S.
Department of Commerce study estimated that Internet users are spending an
increasing amount of time on the Internet, with Internet traffic doubling every
100 days.
The growing acceptance of the Internet as a safe, secure and cost-effective
means of doing business represents an enormous opportunity for companies to
generate additional revenues through Internet commerce. IDC estimated that
revenue from business-to-consumer e-commerce will increase from approximately
$15 billion in 1997 to more than $178 billion in 2003, a compound annual growth
rate of 51%. Forrester Research, a consulting and analysis firm, estimates that
revenue from business-to-business e-commerce will increase from approximately
$43 billion in 1998 to more than $1.3 trillion in 2003, a compound annual growth
rate of 98%. We expect Internet banking to increase in popularity, as well. As
Internet banking increases in popularity with consumers and businesses, we
expect more financial organizations to offer Internet-based financial services
to their customers. IDC estimated that the number of banks offering online
banking services will increase from 1,150 in 1998 to 15,845 by 2003.
Similar changes are occurring around the world. Forrester Research
estimates that nearly 16 million Europeans became Internet-enabled in 1999,
doubling penetration to 49 million Internet users, or 13% of the
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population of Europe. In addition, Datamonitor, a market research firm, predicts
that there will be over 21 million people in Europe banking over the Internet by
2004. The market for financial services in Europe is changing dramatically with
the advent of a single currency and less restrictive work and travel laws across
a large block of Western Europe. Our clients and potential clients are taking
advantage of these changes to pursue pan-European financial services strategies
which we believe will rely heavily on the Internet.
Worldwide use of wireless telecommunications has grown rapidly as cellular
and other emerging wireless communications services have become more widely
available and affordable for the mass business and consumer markets. Advances in
technology, changes in telecommunications regulations and the allocation and
licensing of additional radio spectrum have contributed to this growth
worldwide. Dataquest, a market research firm, estimates that there were
approximately 217 million digital wireless subscribers worldwide at the end of
1998 and that the number of subscribers will grow to 706 million by the end of
2002.
While use of the Internet has grown, changes have occurred to the
regulatory framework facing financial organizations like banks, brokerage firms
and insurance companies. In the fourth quarter of 1999, Congress repealed the
Banking Act of 1933 (Glass-Steagall), which separated commercial banking from
investment banking, and also repealed a 1956 law that separated bank and
insurance companies. Under the current guidelines, banks, insurance companies
and securities firms are allowed to enter one another's businesses through
direct offerings or through mergers or consolidations.
As a result of these market trends and industry changes, financial
organizations must compete for customers who are demanding the enhanced service
and increased personal convenience they can derive by using the Internet. This
competition is accelerating the demand for an integrated technology solution
that satisfies the service demands of customers, while providing the financial
organizations with a convenient personalized communication and marketing
channel. Because of the technological difficulties, long development times and
risks associated with building internal solutions, many financial organizations
are seeking third-party providers, like us, to design and implement their
Internet solutions.
THE S1 ADVANTAGE
We believe we are well positioned to provide solutions to the problems
posed by the changing financial services industry because we offer financial
organizations a one-stop-shop for their Internet financial services needs. We
believe that we derive our competitive advantage from our:
- ability to serve financial organizations across all of their targeted
markets and applications;
- broad range of innovative products, including Internet financial services
applications, our personal information aggregation service and our
customer contact technology, all of which are scalable to meet increasing
end user demand;
- global reach with clients on five continents and 1,626 employees
worldwide;
- management team's experience, vision and expertise in the financial
services industry; and
- ability to offer our clients the option to implement our solutions
directly or to outsource them to our Data Centers.
We offer our solutions to all sizes and types of financial organizations,
ranging from small banks to global financial institutions, brokerage firms and
insurance companies. In addition, through our pending acquisition of Q-Up
Systems, Inc., we intend to expand our coverage of the community bank market. To
these financial organizations, we offer solutions designed to span all of their
targeted markets. We provide products that empower our clients to engage over
the Internet not only individuals of varying degrees of wealth and financial
sophistication, but also small businesses and large corporations.
To community banks and other financial organizations that prefer to focus
solely on their Internet banking strategies, we offer a complete turnkey,
Microsoft Windows NT-based Internet banking product. We have implemented our
NT-based product for more financial organizations than any other company
offering an NT-based Internet banking product. To financial organizations
desiring to offer additional functionality to
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consumers, we offer a product that integrates banking, investments and insurance
applications with personalized content, resulting in a complete financial
destination site. We also offer business-oriented Internet-based products that
deliver banking and cash management along with customizable content. In
addition, we complement these financial services products with our personal
information aggregation service and our customer contact technology.
We have established a global infrastructure and distribution network
through which we deliver our products and services through our acquisitions of
FICS and Edify in November 1999 and our strategic relationship with Andersen
Consulting. Because all of our Internet financial services solutions can be
customized for use with multiple languages and currencies, we believe we are
well-positioned to exploit this infrastructure advantage through continued
global expansion. Since November 1999, we have established several new client
relationships abroad. In addition, we have licensed our wireless solutions to
clients in Greece, Luxembourg and Australia over the last year.
Our management team's experience, vision and expertise in the financial
services industry also differentiate us from our competitors. Using technology
we developed while we were a subsidiary of Security First Network Bank, in 1995
we launched SFNB as the first FDIC-insured Internet bank in the world. Our
executive team is consistently recognized for its industry experience, talent
and visionary strength. Our co-founder and chief executive officer, James S.
Mahan, III, was recently named one of the top ten most influential personalities
in banking by FutureBanker magazine. In addition, Mr. Mahan and virtually all of
our senior executives gained experience in the financial services industry
before joining us. We believe this experience provides us with insight into the
needs of financial organizations.
We believe our Data Center operations provide us with another advantage
over our competitors. We believe that Internet-based solutions are more
difficult for our clients to support than other technologies they may employ. As
a result, to meet our clients' increasing outsourcing needs, we built a Data
Center near our Atlanta headquarters. Through our Data Centers, we provide
organizations with a cost-effective alternative to building, staffing and
maintaining their own data centers to host their Internet financial services
offerings. Our Data Center operations provide us with recurring revenues from
our clients based on the number of their customers who are using our products.
Because we anticipate that global demand for outsourcing of Internet-based
financial applications will increase, we intend to expand our Data Center
operations internationally. We are currently establishing data center sites in
London and Singapore to serve our clients in Europe and the Asia/Pacific region.
THE S1 STRATEGY
We provide Internet-based solutions to financial organizations worldwide
through our "engage, enable, everywhere" strategy. Our solutions allow our
clients to engage and enable their customers to access their financial
information and conduct transactions with them everywhere the Internet is
available. Through our solutions, we enable our clients to extend and strengthen
customer relationships, increase revenue and create a competitive advantage. We
describe the key elements of our "engage, enable, everywhere" strategy below.
Maintain technology leadership. We have invested heavily in the
development of our technology since our inception. In February 2000, we received
a patent for our invention of the three-tier architecture, which combines local
data storage with interfaces to the main financial system, creates a superior
capability to access financial information for customers of our clients by
providing greater availability of the information and an interactive register.
In addition, we continue to engineer our technology to provide increased
scalability. Performance testing on our most recent version of our Consumer
Suite indicated that the product could support up to 20 million end users in a
typical client configuration. We also continue to expand the ability of our
product to work with all Internet-enabled devices. We have implemented wireless
solutions in the United States, Europe and Australia that enable customers of
our clients to access their account information and conduct transactions over
the Internet through cellular telephones and hand-held personal digital
assistants. We intend to expand the availability and breadth of our wireless
solutions to meet the growing demand we perceive for wireless solutions. We plan
to continue to offer leading-edge technology that empowers our clients to offer
feature-rich and easy-to-use Internet financial services in a secure
environment.
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Continue to introduce leading-edge products and services. We plan to
develop and acquire additional products and enhancements to existing products to
respond to changing client needs and market demands. Our solutions enable end
users of our clients to consolidate, store, personalize and process their
financial information. We incorporate into our solutions a broad range of
products, allowing our clients to engage their customers over the Internet. For
example, we incorporate BroadVision's "One-to-One" marketing product in our
solutions, which allows our clients to market additional products and services
to particular customers based on their characteristics and the activities they
perform while using our products. Also, as a result of our acquisition of
VerticalOne Corporation in November 1999, we now offer an innovative aggregation
service that makes our solutions more appealing to end users who wish to view
all of their financial information and other personal account information at our
clients' Web sites. We also offer interactive voice response solutions.
Partner with leading distribution and implementation players. We intend to
expand and leverage our relationships with key business partners. These
relationships broaden our distribution network and provide resources that
contribute to effectively maximizing opportunities. For example, in 1999 we
entered into a relationship with Andersen Consulting. Andersen Consulting
provides us with associates whom we train to assist us in the implementation of
our products and also supports our marketing of our products to large financial
organizations worldwide. In addition, we have formed distribution alliances with
third-party data processors, including Fiserv, Inc., M&I Data Services and NCR
Corporation, through which we support our small and mid-sized financial
organization clients.
Continue to expand our operations internationally. Our acquisition of FICS
and Edify and our strategic relationship with Andersen Consulting have provided
us with a global infrastructure and distribution network through which we can
deliver our solutions. We plan to continue to expand our operations in Europe
and the Asia/Pacific region through continued development of integrated banking,
investment and insurance solutions. We also intend to market our aggregation
service and our wireless solutions aggressively, both alone and bundled with our
core products. In addition, we expect to expand our existing Data Center
operations to meet anticipated growth in international demand for outsourcing
services. We are currently establishing a European-based Data Center in London
and a Data Center in Singapore for our Asia/Pacific regional operations. Like
our existing Data Center in Atlanta, we are designing each of these new
facilities to host our entire line of products and to ensure the security of
data and communications. We may enhance our global expansion efforts through
strategic relationships or joint ventures with key players in a particular
region if we determine that joining forces can help us achieve our goals more
efficiently. In addition, we will evaluate and may pursue alternative capital
structures, including strategic partnerships, joint ventures or equity
offerings, to enhance our global expansion efforts. For example, in December
1999 we announced a letter of intent with Zurich Financial Services under which
Zurich would invest in a separate business unit that would operate our
European-based Data Center. We are continuing to evaluate that structure, as
well as alternative structures for our European operations.
Pursue strategic acquisitions. We intend to pursue strategic acquisitions
that would provide additional technology, product or service offerings,
additional industry expertise, a broader client base or an expanded geographic
presence. In November 1999, using these criteria, we acquired three companies:
Edify, based in Santa Clara, California; FICS, based in Brussels, Belgium; and
VerticalOne, based in Atlanta Georgia. Since January 1, 2000, we have entered
into agreements to acquire two additional companies: Davidge Data Systems, Inc.,
a New York, New York-based provider of order routing services to brokerage
firms; and Q-Up Systems, Inc., an Austin, Texas-based provider of Internet
financial services solutions to community banks. If we had closed on each of
these two pending acquisitions on March 8, 2000, we would have issued an
aggregate of approximately 2.6 million shares of our common stock and assumed
and issued options that, if exercised, would have required us to issue up to
approximately 1.7 million additional shares of our common stock.
We intend to structure our organization to maximize our ability to apply
our management team's experience and expertise to address the changing financial
services industry. In fiscal year 2000, we are operating our VerticalOne
subsidiary and our interactive voice response divisions as separate business
units that pursue their own business plans. We plan to operate Davidge and Q-Up
as separate business units after we close on these acquisitions, as well. We
will also continue to evaluate and make strategic investments in,
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and develop relationships with, start-up companies that we believe offer promise
of developing additional products or services complementary to our own.
PRODUCTS AND SERVICES
We build integrated Internet-based solutions that enable our clients to
deliver value to their customers, allowing our clients to increase revenue,
strengthen customer relationships, and gain competitive advantage. Our core
financial services products enable customers of financial organizations to
access their account information and conduct most of their financial
transactions over the Internet. Our financial services products can be combined
with financial planning tools and personalized content which enhance our
clients' abilities to keep their customers engaged. Our recently acquired
VerticalOne aggregation service increases the frequency, duration and quality of
these customers' visits to our clients' Web sites. We also maintain a global
professional services staff whose members are fully trained in the customization
and implementation of our solutions.
Our products and services address the needs of financial organizations to
offer solutions across multiple markets ranging from the typical consumer to
high net worth individuals and from small businesses to large corporations. Our
products integrate components covering the full scope of the financial services
industry, including banking, brokerage and insurance applications. We design our
products to ensure scalability as the number of customers using our clients'
Internet financial services applications increases. Performance testing on the
most recent version of our Consumer Suite indicated that the product could
support up to 20 million end users in a typical client configuration.
We separate our product lines into those serving the consumer and business
markets. We describe the features of our products within each of these
categories below.
Consumer-Oriented Products
We offer two Internet banking solutions targeted to meet both the needs of
financial organizations that desire a turnkey solution and the needs of
organizations that desire a more comprehensive solution.
To community banks and other financial organizations that prefer to focus
solely on their Internet banking strategies, we offer S1 Retail Banking, a
Windows NT-based banking solution that is complete and ready to operate when
delivered to the financial organization. S1 Retail Banking offers a targeted
group of services and functionality ideal for financial organizations focused on
banking, and can be customized with optional bill payment and presentment and
targeted marketing capabilities. S1 Retail Banking is the most widely installed
NT-based Internet solution at mid-sized and large banks.
Our other Internet banking product, S1 Consumer Banking, may be integrated
with the rest of the S1 Consumer Suite products, resulting in a comprehensive
product offering. S1 Consumer Banking provides an interactive check register
that is updated daily with cleared transactions and real-time for any future
dated transactions entered by the customer. In addition, financial information
can be supplemented with personalized categories for reporting and financial
management.
The S1 Consumer Suite is comprised of the additional following
applications:
- S1 Consumer Investments
- S1 Relationship Management
- S1 Consumer Insurance
- S1 Bill Presentment
- Content and Planning Tools
The S1 Consumer Suite appeals to financial organizations that want to
integrate multiple capabilities for the convenience of their customers. The S1
Consumer Suite is a comprehensive and customizable suite that allows financial
organizations to provide their customers with Internet banking, brokerage, bill
presentment and payment and insurance products and services. In addition,
through the S1 Consumer Suite, by identifying
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the activities they perform while using our applications, financial
organizations can engage in personalized "one-to-one" marketing of additional
products and services geared to meet the needs of their existing customers. This
suite creates financial destination sites with broad, robust functionality
integrated across multiple financial products, including many optional add-ons
such as customer care, tax preparation and financial planning tools.
Business-Oriented Products
S1 Business Suite. The S1 Business Suite is designed for financial
organizations that want to deepen their relationships with small to mid-sized
businesses by offering remote access to their financial information along with
cash and financial management tools. The S1 Business Suite delivers a wide range
of financial services including banking, cash management, and customizable
content to create a financial destination site for the business user.
S1 Corporate Suite. We developed the S1 Corporate Suite for financial
organizations that want to focus on their large corporate customers by offering
a comprehensive, Internet-based cash management offering. The S1 Corporate Suite
offers broad-ranging banking functionality over the Internet for global
payments, balance and transaction reporting, check services, customer messaging,
custody and trade finance. It is designed for financial organizations looking to
provide integrated Internet banking applications to meet their customers
worldwide needs.
Complementary Offerings
In addition to the products and services described above, we deliver a
number of other products and services that extend our core products.
Aggregation Service. Through our wholly owned subsidiary, VerticalOne, we
offer a service that consolidates, organizes and presents the personal account
information of our clients' customers at our clients' Web sites. Our service
allows customers of our clients to go to our clients' Web sites to view summary
snapshots of their account balances from a variety of sources, including:
- airline and other reward programs;
- communications companies, including telephone and cellular services;
- brokerage and other investment sites;
- credit card companies;
- banks;
- Web-based e-mail; and
- other service providers that bill customers over the Internet.
Because our aggregation service offers our clients' customers the
convenience of a single master password and user identification code, it allows
these customers to eliminate the need to remember and key in disparate user
names and passwords at each source's site. In addition, with our "Quick Login"
feature, our clients' customers can use a hyperlink to jump directly to their
opening screens at a particular Web site if they want to after viewing their
account balances from our clients' sites.
We have marketed our aggregation service successfully to non-financial
organizations including BellSouth Corporation and Disney's Go Network, and we
intend to continue to target other organizations that maintain an active
Internet presence. Moreover, we believe that this service is particularly useful
for clients that employ our financial services solutions. By combining our
financial services solutions, which consolidate the customer's financial data
within an organization, with our aggregation service, financial organizations
can act as an aggregator of their customers' account information from other
financial organizations or account sources. As a result, financial organizations
can position their Web sites as financial destinations that provide customers
with access to all of their personal account information.
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Customer Contact Technology. We offer interactive voice response solutions
that allow organizations to automate, integrate and personalize interactions
with customers through multiple channels, yielding stronger, more profitable
relationships. Using customer-determined profiles and interests, our clients can
notify their customers about new products or services. Calls that do require
human assistance can automatically be routed to the most appropriate person. All
of these goals can be accomplished through a combination of channels, including
telephone, Internet, e-mail, fax, and pager.
In addition, we offer a natural language speech recognition product and an
optional marketing campaign management component that enables businesses to
deliver products and services to targeted prospects consistently through
multiple channels.
Data Center Services. In August 1999, we opened a new Data Center in
Atlanta to accommodate our clients' increasing outsourcing needs. The Data
Center employs the latest, proven technology to support some of our largest
financial organization clients. We earn recurring revenues for each end user we
process for our clients through our Data Center.
Through our Data Center operations, we provide organizations with a
cost-effective alternative to building, staffing and maintaining their own data
centers to host their Internet financial services offerings. By outsourcing to
our Data Centers, organizations can gain immediate access to highly skilled
information systems specialists who know the online financial services business
and can deliver solutions to the organizations' customers faster.
We expect to continue to extend our Data Center operations to meet
anticipated growth in international demand. We recently entered into a sublease
for property on which we are establishing a European-based Data Center. In
addition, we are currently establishing a Data Center in Singapore for our
Asia/Pacific regional operations as demand for these outsourcing services
increases. Like our existing Data Center in Atlanta, we are designing each of
these new facilities to host our entire line of products and to ensure the
security of data and communications.
Professional Services. We surround our applications with flexible
implementation, maintenance and support options. We provide professional
services for the installation and integration of our products, including
installation at third-party data processing centers and direct licensee sites or
integration of the financial organization's data processing systems within our
Data Centers. In addition, we provide training, consulting and product
enhancement services.
We maintain a worldwide customer engagements team of more than 512
qualified professionals to assist with customization and implementation of our
applications and to support the efforts of our partners to integrate our
solutions with their own. In addition, we have partnered with Andersen
Consulting, one of the world's largest and most highly regarded systems
integrators, to offer a comprehensive and experienced team of consultants and
implementation specialists. A significant number of Andersen Consulting
associates have already been trained on implementing our applications and are
now working actively with our organization to service our customers.
CLIENTS AND MARKETS
We provide innovative Internet-based financial services solutions to global
financial services organizations. We also provide aggregation services to
leading Internet portal providers. In addition, we provide our customer
relationship management technology to companies in the consumer goods,
manufacturing, insurance and healthcare, technology and telecommunications
industries.
During 1999, we provided implementation and product enhancement services
for State Farm Mutual Automobile Insurance Company. We derived 40% of our total
revenues in 1999 from State Farm. On a pro forma basis, giving effect to our
acquisitions of FICS, Edify and VerticalOne as if the transactions occurred on
January 1, 1999, State Farm accounted for 21% of our total revenue for 1999.
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ALLIANCES AND PARTNERSHIPS
We have established strategic alliances with organizations around the globe
to deliver competitive and comprehensive Internet-based financial service
solutions to our customers. Through these global alliances, we intend to
accelerate the pace of innovation, implementation and service delivery to
financial organizations worldwide. Following is a description of four strategic
alliances that we consider particularly important to our operations:
Andersen Consulting LLP
In February 1999, we formed a strategic alliance with Andersen Consulting
to jointly develop business strategies and implementation processes that
increase an organization's ability to leverage new technology, enhance speed to
market and compete more effectively in delivery of Internet-based services. This
alliance added significant resources that helped expand our capacity for product
development, distribution, delivery and implementation. In addition, Andersen
Consulting agreed to promote us as its preferred provider of Internet banking
solutions. As part of the alliance, a member of the Andersen Consulting
worldwide organization made an investment in our common stock, and we issued to
Andersen Consulting a warrant to purchase additional shares of our common stock.
We expect to benefit from the extensive relationships Andersen Consulting has
established with strategic financial services companies throughout the world. In
addition, Jackson L. Wilson, Jr., Managing General Partner -- AC Ventures, a
unit of Andersen Consulting that invests in new and innovative businesses,
joined our Board of Directors in August 1999. Mr. Wilson is also a member of
Andersen Consulting's Executive Committee.
Hewlett-Packard Company
In February 1999, we entered into an alliance with Hewlett-Packard to
provide integrated financial services. As part of the alliance, Hewlett-Packard
made an investment in our common stock. Since February 1999, Hewlett-Packard has
promoted us as its preferred provider of Internet applications for the financial
services industry. We anticipate that this alliance will continue to expand our
distribution capacity through Hewlett-Packard's global infrastructure.
Intuit Inc.
In May 1999, we entered into a strategic agreement with Intuit to deliver
online financial software and services to financial organizations. In connection
with that agreement, Intuit made an investment in our common stock and we
granted Intuit an option to purchase a significant number of additional shares
of our common stock. Since signing this agreement, we have worked on integrating
Intuit's TurboTax software within our applications. Further, we plan to equip
several of our customers with personal financial management and income tax
preparation and electronic filing capabilities in time for preparation of
individuals' tax returns for the year 2000.
BroadVision, Inc.
We have established a relationship with BroadVision to integrate the
BroadVision "One-to-One" marketing product with our solutions. As part of this
relationship, we obtained a license to use and resell BroadVision's "One-to-One"
marketing suite of products and BroadVision made an investment in our common
stock. By integrating the "One-to-One" product into the S1 Consumer Suite,
financial services firms using our products will be able to collect and organize
data resulting from customer transactions and use that data to specifically
target cross selling of products.
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ADVISORY RELATIONSHIPS
We maintain a Customer Advisory Council to provide our executive management
team with strategic intelligence, insight, forward vision and guidance to ensure
our strategic vision is aligned with the evolving market for Internet-based
financial services solutions. The Advisory Council:
- reviews product strategy;
- assesses potential strategic partnership opportunities;
- provides intelligence on competitive offerings and other financial
institutions; and
- provides technical guidance on product functionality.
The Advisory Council includes representatives of Citibank, BankAmerica, The
Principal Financial Group, Synovus Financial Corp., Royal Bank of Canada, and
other financial organizations.
In addition, we have established a Product Advisory Committee that assists
us in defining and prioritizing detailed requirements for the products that
comprise the S1 Consumer Suite, the S1 Business Suite and the S1 Corporate
Suite.
SALES AND MARKETING
We sell our solutions to small, mid-sized and large financial
organizations. As of February 29, 2000, our sales force was comprised of 189
professionals structured in three major regional groups -- Americas, EMEA
(Europe, Middle East and Africa) and APAC (Asia/Pacific/Australia). Within each
group, we divide our sales force into two teams: named accounts and field sales.
Our named accounts sales team manages our relationships with existing customers
and markets our products to the 300 largest financial organizations in the world
based on asset size. Our named accounts sales force focuses on developing
long-term relationships with senior management of large financial organizations,
typically including these organizations' chief executive officers and the heads
of their retail banking and information technology divisions. The sales cycle
for these large financial organizations generally lasts from six to 18 months.
Contracts we enter into with these large financial organizations typically have
multi-year terms. Once we have established a relationship with these
organizations and their senior management teams, we continue to market
additional products and services to them.
Our field sales team focuses on building successful relationships with
smaller financial organizations. In addition, our field sales team assumes
responsibility for our relationships with our distribution partners including
M&I Data Services, Fiserv and NCR, thereby maximizing our market penetration
through the reseller channel. Our acquisition of Q-Up will provide us with
additional relationships and management focus to further expand our penetration
into community financial institutions. The sales cycle for these small to mid-
sized financial organizations typically lasts from two to six months, and the
contracts we enter into with them typically provide for direct delivery and
service requirements which we perform over a shorter period of time than our
contracts with large financial organizations. To maximize the understanding of
our solutions, our sales support team provides functional and technical sales
support.
In addition to our internal sales efforts and our joint efforts with
distribution partners like Andersen Consulting, M&I Data Services, Fiserv and
NCR, we market our products and services in other ways to build awareness of the
S1 brand. Our marketing efforts include:
- participating in and exhibiting at industry conferences and trade shows;
- maintaining memberships in key industry organizations, such as Bank
Administration Institute and Global Concepts, a payment systems
consulting firm;
- establishing close relationships with industry analysts to help guide our
product development and marketing efforts; and
- establishing "preferred vendor" relationships like those we have
solidified with Andersen Consulting, Hewlett-Packard and Intuit.
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PRODUCT AND SOFTWARE DEVELOPMENT
As of February 29, 2000, our product management and development staff
consisted of 483 employees located in three countries. Our product management
group is responsible for strategic product planning, managing customer and
market demands, performing competitive analysis and managing the product
roll-out process for each product under development. The department consists of
individuals with extensive industry expertise related to the product they are
managing. The product managers work closely with the development group to ensure
that the functionality in the product exceeds industry standards.
Our development group creates new products following an iterative and
incremental development life cycle. The software life cycle consists of six
phases: initiation planning, analysis-design, construction, testing,
implementation and maintenance. Our software developers have extensive
experience in advanced software development techniques and work closely with our
product managers to ensure that they are considering the complex processes
involved in financial services systems.
This same group is also responsible for quality assurance of products
utilizing expertise in software quality assurance techniques. The group utilizes
an incremental form of testing for all products. Testing is accomplished in
three separate phases: unit testing, system testing and integration testing.
These three phases or levels of testing accompany the product development cycle
from initial coding through product pre-release for each developmental project.
The goal of each testing phase is to detect errors at the earliest stage of the
system/product development cycle.
TECHNOLOGY
Our product architecture provides an open, scalable platform to maximize
the value and power of the applications while enabling integration of future
technologies.
Our platform is equipped to deliver hybrid solutions that are designed to
meet various business needs of our clients. We deliver both fat and thin server
capabilities to suit individual customer requirements. Fat server technology
provides the capability to consolidate the end user's financial data from
disparate host systems and allows end users to categorize and report on this
information. Thin server capabilities provide a cost-effective solution for
financial organizations that are looking to provide base functionality to their
customers.
Our applications are designed for various operating systems and platforms.
We offer solutions that operate within a UNIX or NT environment, as well as
solutions that run on IBM, HP or Sun Microsystems platforms. Our applications
are designed with open standards that facilitate integration with both front and
back-end systems. Our extensible open object architecture facilitates the
integration of applications developed on the same or disparate platforms,
developed by us or our partners, internal development teams or other third-party
application developers. We have integrated our applications with more than 90
different back-end systems to date. The resulting integrated solutions not only
leverage the individual strengths of these separate applications, but also
create new service opportunities that yield a higher value to financial
organizations than each of the applications alone. Multiple delivery channel
support and application integration is accomplished through the use of a number
of standards based on approaches such as Extensible Markup Language (XML),
Component Object Model (COM), CORBA and Open Financial Exchange (OFX).
Our Data Center provides access to host computers for messaging, online
updates and inquiry into the systems operating our solutions. All communications
between the applications running in the Data Center and the organization's host
network are routed through a Virtual Private Network connection in order to
provide enhanced security. The Data Center is responsible for ensuring
availability of all types of communications including online, email, frame relay
circuit and host communications. In addition, the Data Center provides
production, change control, job scheduling, data storage management, storage of
backups and job performance analysis for systems operating our products. Our
recovery plan provides the organization with a defined recovery site, data
processing resources and vital records required for restoration of all the
organization's operations in the Data Center.
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COMPETITION
The market for online banking and financial software is competitive,
rapidly evolving and subject to technological change. With the continued
development of the Internet as an accepted avenue for providing financial
services, we expect competition to intensify. Currently, we perceive that our
primary competition comes from the in-house development efforts of our target
clients, as some financial organizations believe in using their own resources to
build solutions. We believe that this strategy is inefficient for financial
organizations because:
- building an Internet-based financial services solution greatly lengthens
time to market;
- building, maintaining and upgrading the solution is very costly;
- attracting and retaining the necessary technical personnel is difficult
for these organizations; and
- technology development may be too far outside the financial
organizations' core competencies to be effective or successful.
Additional competitors currently include software companies that provide
turnkey online banking and brokerage solutions and Internet integration tools.
Among the companies offering Internet banking solutions are Digital Insight
Corporation, BROKAT Infosystems AG, Corillian Corporation, Fundtech, Magnet,
IBM, BroadVision, Sybase and Online Resources Corporation.
Our primary competitors with respect to our aggregation service include
Yodlee, EZLogin and Corillian's OneSource product. The offerings of these
competitors are at various stages of development and marketing. In the customer
contact area, we compete principally with stand-alone interactive voice response
vendors including InterVoice-Brite, Inc., Lucent Technologies Inc., Periphonics
Corporation, Syntellect Technology Corporation and TALX Corp.
We believe that our ability to compete successfully depends on a variety of
factors, including:
- our ability to empower our clients to engage their customers by offering
our comprehensive, scalable and easy-to-use products;
- our ability to expand our existing offerings, maintain technological
leadership and introduce new products;
- our success with our global expansion efforts;
- the quality and reliability of our Data Centers and professional
services;
- our ability to integrate successfully the products and service offerings
of companies we acquire through strategic acquisitions;
- the reputation of our solutions in the marketplace; and
- our pricing policies.
INTELLECTUAL PROPERTY
Our success is partially dependent upon our leading-edge proprietary
technology and information. We rely upon a combination of patent, copyright,
trademark and trade secret laws and confidentiality procedures to protect our
proprietary technology and information. We generally enter into nondisclosure
agreements with our employees, contractors, consultants, distributors and
corporate partners that limit access to and distribution of our software,
documentation and other proprietary information.
In many cases, we make efforts to protect our proprietary software and
business practices by obtaining patents for such technology. In February 2000,
we were issued a patent based on our invention of a three-tier architecture with
local data storage to provide customers of our clients with access to their
account information at financial organizations. We currently have seven patents
pending on our technology. We cannot guarantee, however, that applications for
such patents will be granted by U.S. or international authorities, nor
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can we assure that we will be able to enforce such patents, if issued, against
third parties. Further, we cannot be sure that a known or unknown competitor has
patented technology similar or identical to ours, and that such patents may take
priority over ours.
It is our intention to vigorously protect our innovations. Despite our
efforts to protect our proprietary software, unauthorized parties may attempt to
copy or otherwise obtain and use products or technology that we consider
proprietary and third parties may attempt to develop similar technology
independently. In particular, we provide our existing and potential distribution
partners with access to our product architecture and other proprietary
information underlying our licensed software. Policing unauthorized use of our
software is very difficult due to the nature of software, and, while we are
unable to determine the extent to which piracy of our software products exists,
software piracy can be expected to be a persistent problem. In addition,
effective protection of intellectual property rights may be unavailable or
limited in certain countries. Accordingly, there can be no assurance that the
steps we have taken to protect our services and products are adequate to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
GOVERNMENT REGULATION
We are subject to examination, and are indirectly regulated by, the Office
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, or "FRB", the Federal Deposit Insurance Corporation, the Office
of Thrift Supervision and the various state financial regulatory agencies that
supervise and regulate the banks and thrift institutions for which we provide
data processing services. Matters subject to review and examination by federal
and state financial institution regulatory agencies include our internal
controls in connection with our performance of data processing services and the
agreements giving rise to those processing activities. In addition, the FRB has
determined that three bank holding companies, Area Bancshares Corporation,
Huntington Bancshares Corporation and Wachovia Corporation, control our
subsidiary, S1, Inc. As a result, S1, Inc. is subject to restrictions on its
activities and supervision, regulation and examination by the FRB as a company
controlled by bank holding companies.
The adoption or modification of laws or regulations relating to the
Internet, or interpretations of existing law, could adversely affect our
business. Laws and regulations which apply to communications and commerce over
the Internet are becoming more prevalent. For example, a recent session of the
United States Congress resulted in Internet laws regarding copyrights, taxation
and the transmission of specified types of material. Congress also adopted
legislation imposing obligations on financial institutions to develop privacy
policies, restrict the sharing of non-public customer data with nonaffiliated
parties at the customer's request, and establish procedures and practices to
protect and secure customer data. These privacy provisions, which may apply to
us because of the broad definition of "financial institution" contained in the
legislation, will be implemented by regulations that will take effect on or
after November 12, 2000. Even if the regulations do not apply directly to us,
they will apply to our financial institution clients. In addition, the European
Union recently enacted its own privacy regulations and is currently considering
other Internet-related legislation. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing intellectual property, privacy, libel and taxation apply to the
Internet. In addition, the growth and development of the market for online
financial services, including online banking, may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, that
may impose additional burdens on companies conducting business online. We are
also subject to encryption and security export laws which, depending on future
developments, could adversely affect our business.
Any development that substantially impairs the growth of the Internet or
its acceptance as a medium for transaction processing could render our business
or operations more costly, less efficient or impossible.
EMPLOYEES
As of February 29, 2000, we had 1,626 employees. Our employees are not
represented by a collective bargaining unit, and we believe our relationships
with our employees are satisfactory. In addition to full-time
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employees, we have used the services of various independent contractors for
professional services projects and product development.
ITEM 2. PROPERTIES.
Our executive offices are currently located at 3390 Peachtree Road, NE,
Atlanta, Georgia. We have, however, entered into a lease for new executive
office space at a location near our current facilities and intend to move into
the new space once construction is completed in 2001. Our Atlanta-based Data
Center is located at 705 Westech Drive, Norcross, GA. Our European headquarters
are located at Excelsiorlaan 87, B-1930 Zaventem, Brussels, Belgium. We also
maintain offices in the United States in Boston, Charlotte, Dallas, and Santa
Clara. We maintain international offices in Johannesburg, Lisbon, London,
Luxembourg, Madrid, Melbourne, Paris, Rotterdam, Singapore and Sydney.
We lease all of our office space as well as our Data Center sites. We owned
computer equipment with a book value of $19.6 million at December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which S1 or any of our
subsidiaries is a party or of which any of our property or the property of any
of our subsidiaries is the subject, other than ordinary routine litigation
incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) A special meeting of S1's shareholders was held on November 10, 1999.
(b) Not applicable.
(c) The following matters were voted on and approved by S1's shareholders
at the special meeting held on November 10, 1999:
(i) issuance of shares of S1 common stock in the acquisition of FICS
Group N.V. (Proposal 1);
(ii) issuance of shares of S1 common stock in the acquisition of Edify
Corporation (Proposal 2);
(iii) issuance of shares of S1 common stock in the acquisition of
VerticalOne Corporation (Proposal 3); and
(iv) amendment to S1's charter to change its name to "S1 Corporation."
As to Proposal 1, shareholders cast 18,785,907 votes for, 94,811 votes
against, 27,437 abstentions and 6,894,557 broker non-votes. As to Proposal
2, shareholders cast 18,793,846 votes for, 89,071 votes against, 25,238
abstentions and 6,894,557 broker non-votes. As to Proposal 3, shareholders
cast 18,763,976 votes for, 123,386 votes against, 20,793 abstentions and
6,894,557 broker non-votes. As to Proposal 4, shareholders cast 24,884,511
votes for, 172,955 votes against, 17,401 abstentions and 727,845 broker
non-votes. The record date for the special meeting was October 1, 1999.
(d) Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Our common stock has been quoted on the Nasdaq National Market under
the symbol "SONE" since October 1998. Prior to that time, the common stock of
S1's predecessor, Security First Network Bank, was quoted on the Nasdaq National
Market under the symbol "SFNB" from its initial public offering on May 23, 1996
through September 1998. The following table shows, for the periods indicated,
the high and low prices per share of our common stock as reported on the Nasdaq
National Market, as adjusted for the May 1999 two-for one stock split of the
common stock.
HIGH LOW
------ ------
1998
- - ---------------------------------------------------------
First Quarter............................................ $ 6.94 $ 3.19
Second Quarter........................................... 7.88 3.75
Third Quarter............................................ 13.81 5.38
Fourth Quarter........................................... 18.88 4.63
1999
- - ---------------------------------------------------------
First Quarter............................................ $38.00 $14.50
Second Quarter........................................... 79.25 29.50
Third Quarter............................................ 50.25 25.13
Fourth Quarter........................................... 89.00 32.13
As of the close of business on March 8, 2000, there were 599 holders of
record of our common stock.
We have not paid or declared cash dividends on our common stock or
preferred stock since our initial public offering in May 1996 and do not
anticipate paying cash dividends on our capital stock in the forseeable future.
On December 23, 1999, S1 issued to America Online, Inc. a Stock
Subscription Warrant to purchase 84,994 shares of S1's common stock at a price
per share of $80.00. The warrant may be exercised in whole or in part at any
time or times from December 23, 1999 to the fifth anniversary of that date. A
copy of the Warrant is filed as Exhibit 10.16 to this report and incorporated
herein by reference.
(b) Not applicable.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table presents our selected statement of operations data and
our selected balance sheet data on a consolidated basis. We derived the selected
historical consolidated financial data presented below from our audited
consolidated financial statements and related notes. You should read this data
together with our audited consolidated financial statements and related notes.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software licenses.............................. $ -- $ 512 $ 4,142 $ 4,781 $ 19,050
Professional services.......................... -- 699 6,277 13,747 56,432
Data center.................................... -- 56 411 3,181 8,858
Other.......................................... -- -- -- 2,471 8,550
-------- -------- -------- -------- -----------
Total revenues.......................... -- 1,267 10,830 24,180 92,890
-------- -------- -------- -------- -----------
Direct costs:
Software licenses.............................. -- 796 1,605 503 642
Professional services.......................... -- 535 5,346 8,098 36,327
Data center.................................... -- 2,266 6,947 7,218 9,008
Other.......................................... -- -- -- 2,285 7,112
-------- -------- -------- -------- -----------
Total direct costs...................... -- 3,597 13,898 18,104 53,089
-------- -------- -------- -------- -----------
Gross margin............................ -- (2,330) (3,068) 6,076 39,801
-------- -------- -------- -------- -----------
Operating expenses:
Selling and marketing.......................... -- 2,154 4,305 4,723 12,169
Product development............................ -- 4,048 10,507 13,768 24,036
General and administrative..................... 46 3,635 3,981 5,451 13,913
Depreciation and amortization.................. -- 256 1,741 5,347 6,924
Stock option compensation expense.............. -- -- 656 1,544 1,118
Marketing cost from warrant issued............. -- -- -- -- 715
Merger related costs........................... -- -- -- -- 8,744
Acquired in-process research and development... -- -- -- -- 59,300
Amortization of acquisition intangible
assets....................................... -- 7,072 4,525 4,384 40,206
-------- -------- -------- -------- -----------
Total operating expenses................ 46 17,165 25,715 35,217 167,125
-------- -------- -------- -------- -----------
Operating loss.......................... (46) (19,495) (28,783) (29,141) (127,324)
Interest income.................................. 101 1,672 1,481 583 2,237
-------- -------- -------- -------- -----------
(Loss) income from continuing operations......... 55 (17,823) (27,302) (28,558) (125,087)
======== ======== ======== ======== ===========
Discontinued operations:
Loss from operations........................... (1,535) (4,236) (689) (3,059) --
Gain on sale................................... -- -- -- 812 --
-------- -------- -------- -------- -----------
Loss from discontinued operations................ (1,535) (4,236) (689) (2,247) --
-------- -------- -------- -------- -----------
Net loss......................................... $ (1,480) $(22,059) $(27,991) $(30,805) $ (125,087)
======== ======== ======== ======== ===========
Basic and diluted net loss per common share from
continuing operations.......................... $ -- $ (1.52) $ (1.53) $ (1.30) $ (4.28)
Basic and diluted net loss per common share from
discontinued operations........................ (0.08) (0.36) (0.04) (0.10) --
-------- -------- -------- -------- -----------
Basic and diluted net loss per common share...... $ (0.08) $ (1.88) $ (1.57) $ (1.40) $ (4.28)
-------- -------- -------- -------- -----------
Weighted average number of shares of common stock
outstanding.................................... 18,902 11,748 17,846 22,037 29,228
======== ======== ======== ======== ===========
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 3,710 $ 4,122 $ 3,137 $ 14,504 $ 67,850
Total assets................................... 3,948 45,941 36,192 48,293 1,132,487
Notes payable.................................. -- -- -- -- 6,351
Capital lease obligation, excluding current
portion...................................... -- -- -- 159 1,086
Stockholders' equity........................... 3,367 40,859 25,140 17,229 990,807
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
The annual report and the documents incorporated into this annual report by
reference contain forward-looking statements within the safe harbor provisions
of the Private Securities Litigation Reform Act. These statements include
statements with respect to S1's, FICS's, Edify's and VerticalOne's financial
condition, results of operations and business and on the expected impact of the
FICS Transaction, the Edify Transaction and the VerticalOne Transaction on S1's
financial performance. Words such as anticipates, expects, intends, plans,
believes, seeks, estimates and similar expressions identify forward-looking
statements.
These forward-looking statements are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements. These risks and uncertainties include:
- the possibility that the anticipated benefits from our recent acquisition
transactions will not be fully realized;
- the possibility that costs or difficulties related to our integration of
FICS, Edify and VerticalOne will be greater than expected;
- our dependence on the timely development, introduction and customer
acceptance of new internet services;
- rapidly changing technology and shifting demand requirements and internet
usage patterns;
- other risks and uncertainties, including the impact of competitive
services, products and prices, the unsettled conditions in the internet
and other high-technology industries and the ability to attract and
retain key personnel; and
- other risk factors as may be detailed from time to time in our public
announcements and filings with the SEC.
OVERVIEW
We are the leading global infrastructure provider of Internet-based
solutions for financial organizations. Prior to September 30, 1998, we were the
technology subsidiary of Security First Network Bank, which was the first
Internet bank. On September 30, 1998, we completed a reorganization to separate
our banking and technology businesses, and then sold the banking business to a
subsidiary of Royal Bank of Canada. In November 1999, we completed the
acquisitions of Edify, FICS and VerticalOne. On November 10, 1999, we changed
our name from Security First Technologies Corporation to S1 Corporation.
Revenues
We derive our revenues primarily from three sources:
Software licenses. We receive license fees from direct licensees and
third-party data processors. Direct licensees install and operate our products
in their own data centers. We generally receive an initial license fee plus
ongoing fees which are based on either the number of end-users or a percentage
of the initial license fee. We generally recognize revenues from software
license sales upon shipment where no significant obligations remain, in
accordance with AICPA Statement of Position 97-2. When services are considered
essential to the functionality of the software, the software license and the
related services are recognized over the implementation period using the
percentage of completion method of accounting.
A portion of our software license revenue is being recognized on a
straight-line basis over either the term of the agreement or, for contracts
without a term, the estimated period during which post-contract support is
expected to be provided. Under these arrangements, post-contract support and
maintenance were bundled as
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part of the license agreements and sufficient vendor specific evidence did not
exist to allocate the total fee to all elements of the arrangement.
Third-party data processors install our products in their own data
processing centers and license the product to their client institutions,
typically smaller financial services entities like community banks and thrifts.
We receive monthly fees from third party data processors based on the total
number of end-users served by the processors' client institutions. These fees
are recognized as revenue in the period earned.
Professional Services. We provide professional services related to the
installation and integration of our products. These services include:
- installing the product at direct licensees and third-party data
processing centers;
- integrating the financial organization data processing systems with our
data center for data center clients;
- providing product enhancements;
- consulting; and
- training.
Revenues derived from contracts to provide services on a time and materials
basis are recognized as the related services are performed. Revenues from
professional services provided on a fixed fee basis are recognized using the
percentage of completion method, measured by the percentage of labor hours
incurred to date to estimated total labor hours for each contract.
Data Center. We receive recurring monthly fees from financial institutions
that have chosen to use our software and outsource the processing of their
financial transactions to our data center. These fees are based on the number of
end users of the client institution. In addition, we receive monthly fees for
technical support. We recognize these revenues as the services are performed.
Expenses
We expect to continue making significant investments in product development
to enhance our existing products, develop new products and further advance our
technology. Future expenditures in product development will be primarily
attributable to the addition of software development personnel with the
technological and industry expertise relevant to our technology.
We expect to increase our sales and marketing efforts to expand our
customer base. We expect the sales and marketing staff, which numbered 189 at
December 31, 1999, to grow significantly during 2000. We also intend to continue
promoting our products and services through conferences, seminars, direct
marketing and trade publications.
We record software development costs in accordance with Financial
Accounting Standards Board Statement No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed". We currently do
not have any capitalized software development costs.
We had net operating loss and tax credit carryforwards of approximately
$211.0 million at December 31, 1999 with expiration dates beginning in the year
2010 and ending in the year 2019. Of this amount, $87.1 million related to stock
option tax deductions, which will be reflected as additional paid-in capital
when realized.
We have incurred annual and quarterly losses from operations since
inception. At December 31, 1999, we had an accumulated deficit of $207.9
million.
BUSINESS ACQUISITIONS
On November 10, 1999, we completed the acquisitions of Edify and
VerticalOne. On November 18, 1999, we completed the acquisition of FICS. All
three acquisitions have been accounted for as purchase
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business combinations. Accordingly, the consolidated financial statements
include the results of operations of Edify and VerticalOne from November 1, 1999
and the results of operations of FICS from December 1, 1999.
We exchanged 5,966,333 shares of common stock and 1,319,044 employee stock
options with a value of approximately $378.2 million for all of the outstanding
shares and stock options of Edify. Of the total purchase price of $381.7
million, which includes $3.5 million of costs incurred directly related to the
acquisition, we allocated $296.7 million to goodwill, $34.0 million to
identifiable intangible assets, $20.0 million to in-process research and
development and $31.0 million to net assets acquired.
We exchanged 3,842,487 shares of common stock and 471,440 employee stock
options with a value of approximately $161.4 million for all of the outstanding
shares and stock options of VerticalOne. Of the total $179.4 million purchase
price, which includes $3.0 million of acquisition costs and $15.0 million of
preferred stock purchased before the closing of the acquisition, we allocated
$126.2 million to goodwill, $22.5 million to identifiable intangible assets,
$7.3 million to in-process research and development and $23.4 million to net
assets acquired.
We exchanged 10,000,000 shares of common stock and 1,149,638 employee stock
options with a value of approximately $421.3 million for all of the outstanding
shares and stock options of FICS. Of the total $426.1 million purchase price,
which includes $4.8 million of costs incurred directly related to the
acquisition, we allocated $401.3 million to goodwill, $48.0 million to
identifiable intangible assets, $32.0 million to in-process research and
development and $55.2 million to net liabilities acquired. The former FICS
stockholders may also be able to obtain up to an additional 4,500,000 shares of
our common stock over a two-year period if FICS meets specified criteria while
operating as our subsidiary.
RESULTS OF OPERATIONS
The following discussion of our results of operations for the years ended
December 31, 1997, 1998 and 1999 is based on data derived from the statements of
operations contained in our audited consolidated financial statements appearing
elsewhere herein. The following table presents this data as a percentage of
total revenues:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
------ ------ ------
Revenues:
Software licenses.................................. 38.2% 19.8% 20.5%
Professional services.............................. 58.0 56.9 60.8
Data center........................................ 3.8 13.1 9.5
Other.............................................. -- 10.2 9.2
------ ------ ------
Total revenues............................. 100.0 100.0 100.0
------ ------ ------
Direct costs:
Software licenses.................................. 14.8 2.1 0.7
Professional services.............................. 49.4 33.5 39.2
Data center........................................ 64.1 29.9 9.7
Other.............................................. -- 9.4 7.7
------ ------ ------
Total direct costs......................... 128.3 74.9 57.3
------ ------ ------
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YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
------ ------ ------
Operating expenses:
Selling and marketing.............................. 39.8 19.5 13.1
Product development................................ 97.0 56.9 25.8
General and administrative......................... 36.8 22.6 15.0
Depreciation and amortization...................... 16.1 22.1 7.5
Stock option compensation expense.................. 6.0 6.4 1.1
Marketing cost from warrant issued................. -- -- 0.8
Merger related costs............................... -- -- 9.4
Acquired in-process research and development....... -- -- 63.8
Amortization of acquisition intangible assets...... 41.8 18.1 43.3
------ ------ ------
Total operating expenses................... 237.5 145.6 179.8
------ ------ ------
Operating loss....................................... (265.8) (120.5) (137.1)
Interest income...................................... 13.7 2.4 2.4
------ ------ ------
Loss from continuing operations...................... (252.1)% (118.1)% (134.7)%
====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Total revenues increased by $68.7 million to $92.9 million for the year
ended December 31, 1999 from $24.2 million in the year ended December 31, 1998,
an increase of 284%. The components of 1999 revenue were $19.1 million in
software license fees, $56.4 million in professional service fees, $8.9 million
in data center fees and $8.5 million in other revenue. As a result of the size
of the companies with which we do business, the magnitude of our implementations
and our limited amount of capacity to perform implementations, a significant
portion of our revenues may be attributed to a limited number of clients in any
given period.
Software Licenses. Software license fees increased by $14.3 million to
$19.1 million in the year ended December 31, 1999 from $4.8 million in the year
ended December 31, 1998, an increase of 298%. Software license fees represented
21% of total revenues in the year ended December 31, 1999 compared to 20% of
total revenues in the year ended December 31, 1998. Approximately $9.9 million
of the increase in software license fees relates to the acquisitions of Edify
and FICS in the fourth quarter of 1999. Approximately $4.0 million of the
remaining increase relates to the recognition of revenue from licensing
agreements entered into in the fourth quarter of 1998. These license fees have
been recorded as deferred revenue and are recognized as revenue over a
three-year maintenance period.
Professional Services. Professional services revenues increased by $42.7
million to $56.4 million in the year ended December 31, 1999 from $13.7 million
in the year ended December 31, 1998, an increase of 312%. Professional services
revenues represented 61% of total revenues in the year ended December 31, 1999
compared to 57% of total revenues in the year ended December 31, 1998.
Approximately $8.3 million of the increase relates to the acquisitions of Edify
and FICS during the fourth quarter of 1999. Excluding the effect of the
acquisitions, the increase in professional services revenue related to several
large implementation projects and product enhancement projects performed for
existing clients during 1999.
Data Center. Data Center revenues increased by $5.7 million to $8.9
million in the year ended December 31, 1999 from $3.2 million in the year ended
December 31, 1998, an increase of 178%. Data Center revenues represented 10% of
total revenues in the year ended December 31, 1999 compared to 13% of total
revenues in the year ended December 31, 1998. The decrease in Data Center
revenue as a percentage of total revenues is a result of the increase in total
revenues due to the acquisitions discussed above. The dollar increase can be
attributed to increased end user demand for our Internet financial applications,
minimum fees for new financial institutions implemented during the year and
increased support fees. The average quarterly revenue per end user increased
slightly to $15.45 in the fourth quarter of 1999 from $15.21 in the fourth
quarter of 1998. We anticipate that the average quarterly revenue per end user
will decrease as financial services entities increase the number of their
customers using our product.
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Revenues associated with the our Data Centers are directly influenced by
the number of financial services entities that are using our products through
our Data Centers and the number of end users of these financial services
entities. During the month of December 1999, our Atlanta-based Data Center
processed in excess of 347,000 Internet accounts, representing approximately
226,000 end users. This amount represents an increase of 134% in the number of
accounts processed from approximately 148,000 and an increase of 143% in the
number of end users from approximately 93,000 for the month of December 1998.
Other. Other revenue increased by $6.1 million to $8.6 million in the year
ended December 31, 1999 from $2.5 million in the year ended December 31, 1998,
an increase of 244%. Other revenue, primarily related to the sale of third-party
hardware and software used in connection with our products, represented 9% of
total revenues in the year ended December 31, 1999 compared to 10% of total
revenues in the year ended December 31, 1998. The increase relates to the sale
of third party hardware and software for two large implementations, which
occurred during 1999. We do not expect to experience this level of other
revenues in future periods.
Direct Costs
Direct costs increased by $35.0 million to $53.1 million in the year ended
December 31, 1999 from $18.1 million in the year ended December 31, 1998, an
increase of 193%. Direct costs represented 57% of total revenues in the year
ended December 31, 1999 compared to 75% of total revenues in the year ended
December 31, 1998.
Software License Costs. Direct software license costs consist primarily of
the cost of third-party software used in our products. Direct costs associated
with software licenses increased by $139,000 to $642,000 in the year ended
December 31, 1999 from $503,000 in the year ended December 31, 1998, an increase
of 28%. Direct costs associated with software licenses represented 3% of
software license fees in the year ended December 31, 1999 compared to 10% of
software license fees in the year ended December 31, 1998. The decrease in
direct costs as a percentage of revenue from 1998 to 1999 relates primarily to
license sales generated from acquired companies that did not include third-party
software. We anticipate that direct costs associated with software licenses will
increase in future periods as we sell additional products that include
third-party software.
Professional Services Costs. Direct professional services costs consist
primarily of personnel and related infrastructure costs. Direct costs associated
with professional services increased by $28.2 million to $36.3 million in the
year ended December 31, 1999 from $8.1 million in the year ended December 31,
1998, an increase of 348%. The increase in direct professional services costs
relates primarily to increased personnel working on an increased number of
professional services projects. In addition, the increase relates to the
acquisitions of Edify and FICS during the fourth quarter of 1999. Direct costs
associated with professional services represented 64% of professional services
revenues in the year ended December 31, 1999 compared to 59% of professional
services revenues in the year ended December 31, 1998. We anticipate that
professional services margins will decrease in future periods as the acquired
companies historically experienced lower professional services margins than we
experienced on a stand-alone basis.
Data Center Costs. Direct Data Center costs consist of personnel and
computer equipment costs. Direct costs associated with Data Center services
increased by $1.8 million to $9.0 million in the year ended December 31, 1999
from $7.2 million in the year ended December 31, 1998, an increase of 25%. The
increase in direct Data Center costs is primarily attributable to additional
costs of our new Atlanta-based Data Center facility, which went into full
operation in July 1999. Direct Data Center costs represented 101% of Data Center
revenues in the year ended December 31, 1999 compared to 225% of Data Center
revenues in the year ended December 31, 1998. The improvement was primarily the
result of increased end user volume.
Other Direct Costs. Other direct costs consist of the cost of third-party
hardware and software sold to customers for use with our products. Other direct
costs increased by $4.8 million to $7.1 million in the year ended December 31,
1999 from $2.3 million in the year ended December 31, 1998, an increase of 209%.
The increase relates to the sale of third-party hardware and software for two
large implementations, which
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occurred during 1999. Other direct costs represented 83% of other revenues in
the year ended December 31, 1999 compared to 92% of other revenues in the year
ended December 31, 1998.
Operating Expenses
Operating expenses increased by $131.9 million to $167.1 million in the
year ended December 31, 1999 from $35.2 million in the year ended December 31,
1998, an increase of 375%.
Selling and Marketing. Selling and marketing expenses increased by $7.5
million to $12.2 million in the year ended December 31, 1999 from $4.7 million
in the year ended December 31, 1998, an increase of 160%. Selling and marketing
expenses were 13% of total revenues in the year ended December 31, 1999 compared
to 20% of total revenues in the year ended December 31, 1998. The dollar
increase was due primarily to the acquisition of Edify during the fourth quarter
of 1999. Edify's sales model was targeted at a larger number of smaller
financial institutions, resulting in higher sales expense as a result of having
a larger sales force. The decrease in selling and marketing expenses as a
percentage of sales was due to our ability to leverage our relatively fixed
selling and marketing expenses over a larger revenue base.
Product Development. Product development expenses increased by $10.2
million to $24.0 million in the year ended December 31, 1999 from $13.8 million
in the year ended December 31, 1998, an increase of 74%. Product development
expenses were 26% of total revenues in the year ended December 31, 1999 compared
to 57% of total revenues in the year ended December 31, 1998. The dollar
increase relates primarily to an increase in personnel expenses for additional
product development initiatives, the integration of the products of acquired
companies and the acquisitions of Edify and FICS. During 1999, we completed the
development of the next version of Consumer Suite and continued development
efforts on bill presentment, the next version of investments and the integration
of the Intuit products with our products. The increase in product development
costs represents our commitment to enhancing the current products by migrating
the existing products to a more efficient software architecture and to
developing new applications. The decrease as a percentage of total revenues in
the year ended December 31, 1999 from the year ended December 31, 1998 resulted
from our ability to leverage product development expenses over a larger revenue
base.
General and Administrative. General and administrative expenses increased
by $8.4 million to $13.9 million in the year ended December 31, 1999 from $5.5
million in the year ended December 31, 1998, an increase of 153%. General and
administrative expenses were 15% of total revenues in the year ended December
31, 1999 compared to 23% of total revenues in the year ended December 31, 1998.
The dollar increase is attributable to the increased personnel and
infrastructure related to the acquisitions of Edify, FICS and VerticalOne. The
decrease as a percentage of our total revenues in the year ended December 31,
1999 from the year ended December 31, 1998 resulted from our ability to leverage
general and administrative expenses over a larger revenue base.
Depreciation and Amortization. Depreciation and amortization expenses
increased by $1.6 million to $6.9 million in the year ended December 31, 1999
from $5.3 million in the year ended December 31, 1998, an increase of 30%.
Depreciation and amortization expenses were 8% of total revenues for the year
ended December 31, 1999 compared to 22% of total revenues in the